The Rise and Fall of a Bitcoin Mining Sensation

Aug 3, 2022 7:00 AM

The Rise and Fall of a Bitcoin Mining Sensation

Compass Mining grew quickly during crypto’s halcyon days. Now, its customers and their thousands of mining machines are stuck.

An armed guard patrols in front of illuminated mining rigs mounted inside racks at the BitRiver Rus LLC cryptocurrency...

Photographer: Andrey Rudakov/Bloomberg/Getty Images

It was 8:45 in the morning of June 13 when Bill Stewart, the CEO of Maine-based bitcoin mining business Dynamics Mining, received a call from one of his employees. “He's like, ‘Every machine inside of our facility in Brunswick [​​in Cumberland County, Maine] has been taken,’” Stewart says. “That's crazy. I couldn't believe it.”

He alerted personnel manning another mining facility, in nearby Lewiston [in Androscoggin County, Maine], and told them to “be on their toes.” He thought a burglar was at large. Stewart had a theory on who might have taken the machines: In those days he had been wrangling with a customer, Compass Mining—a Delaware company that allowed people to buy mining machines and have them hosted in third-party facilities like Stewart’s—due to a dispute over energy bills. Stewart thought Compass had to pay for them; Compass believed their contract said otherwise.

A few days earlier, Dynamics had sent Compass a termination letter demanding payment, and shortly thereafter had switched the company’s machines off. Then, Compass Mining staffers had taken their equipment away from Brunswick, and they were about to enter the Lewiston plant to recover more machines. “They're trying to get inside the building,” Stewart says. “And I'm telling my brother, who runs our security, ‘Do not let them into the building. We're not ripping miners out of the wall. Do not let them inside.’”

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In a lawsuit filed against Dynamics in the Delaware Court of Chancery on June 21, Compass Mining alleged that Stewart, having refused to foot the energy bill he was supposed to pay, had been “holding this valuable equipment hostage to gain leverage in negotiations.” The way Stewart tells it, he simply wanted the removal to happen in an orderly fashion as opposed to hastily and under cover of darkness. What’s more, he says, for a while he had considered continuing to host the machines on behalf of Compass’ customers, cutting out the middleman. “Their customers were reaching out, saying, ‘Hey, can we just mine directly with you?’” Stewart says. The reason that couldn’t happen, Stewart says, is that Compass had not given its customers the identifying serial numbers of the machines they had bought, and there was no way for Stewart to know who owned what.

On July 5 the Court granted Compass’ request to get its machines back, but underlined that that should happen following a formal request to unmount and relocate the machines. Stewart says that during the removal, Compass’ team also grabbed one of Dynamics’ own servers—that is confirmed in an email by one of Compass’ lawyers to Stewart, mentioning how the server had been “inadvertently scooped up” and asking how to return it.

“Our team is laser-focused on serving our clients, and will do so in accordance with the contracts we have in place with our service providers, and by resolving any disputes arising from a fundamental misunderstanding of these contracts in a court of law,” Compass interim co-CEO Thomas Heller said in an email interview.

Even if Compass had prevailed, the optics of the row was terrible. Stewart had chronicled the dispute on Twitter as it played out—accusing Compass of owing him hundreds of thousands of dollars in energy bills, and of having essentially broken into Dynamics’ facility—and thundered at length against Compass in Twitter Spaces. After a vertiginous rise, Compass had spent the last few months in constant crisis mode, until—mere hours after Stewart had started tweeting about his early-morning showdown with the company—it decided to do away with its CEO. At the center of that crisis was Russia’s war with Ukraine, and a bespectacled, curly-haired cybersecurity entrepreneur called Omar Todd.

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Todd, based in Australia, cofounded the pro-Julian Assange WikiLeaks Party in 2013—which went on to compete in the Australian national election and secure 0.6 percent of the vote; in 2016, he joined the pugnacious marine conservation charity Sea Shepherd as a director. In recent months, his work description has grown once more: In his spare time, Todd is orchestrating an international legal effort to rescue thousands of bitcoin mining machines from Compass in Siberia.

The approximately 4,000 mining rigs, whose value Bloomberg has reported at $30 million, are stranded in Russia due to Western sanctions following Moscow’s invasion of Ukraine.

The machines had initially operated in a Russian mining farm under a partnership between Compass, and Russian firm BitRiver. Compass had sold machines to ordinary users and installed them in a BitRiver facility for the price of the rigs plus the payment of a monthly hosting fee.

In April 2022, when the US Office of Foreign Assets Control (OFAC) designated BitRiver a sanctioned organization, Compass ended its relationship with the company to avoid breaching the sanctions. BitRiver turned the machines off and told individual Compass customers who wanted to reclaim their valuable gear that all the machines legally belonged to Compass, according to evidence submitted in a California lawsuit brought against Compass by Veribi LLC, a Nevada-based customer, on July 1.

Both customers who had their serial numbers and those who did not discovered that, in BitRiver’s eye, they held no title to the devices they had purchased—unless Compass stepped in, the machines would stay in Irkutsk, Siberia. “Compass Mining refused to communicate with us and, unfortunately, refused to deal with the return of the equipment,” BitRiver spokesperson Andrei Loboda says in a WhatsApp message. Compass’ Heller describes that characterization as “false” in an email interview. “Compass’ management team will continue to make efforts to assist its customers while maintaining compliance with OFAC regulations,” Heller says.

With nowhere to turn, and millions in sunk costs, customers turned to Todd. “I floated to the top because I was the most public individual,” he says. Todd’s company SkyWiFi Pty raised tens of thousands of dollars through a Discord server for Compass customers. (Todd won’t say exactly how much, but public Discord messages suggest that it is north of $60,000.) He says these funds will be used to retain lawyers and other experts in the US, Russia, Australia, and the UK and broker a solution on customers’ behalf. However, two lawyers featured on the list of advisers Todd provided to the crowdfunders—Erich Ferrari and Vasily Kuznetsov—say they had not in fact been retained and were not planning to work on the case; on August 1 Todd removed some names from the list and notified WIRED of the change in an email.

A good outcome, Todd says, would be to transfer the machines to a Russian facility run by a non-sanctioned organization. Todd says that while Compass’ legal team has been cooperative, the company’s strategy has largely boiled down to watching and waiting. “Compass Mining is waiting for me to help them—they have no answers,” he says.

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Customers rallying behind SkyWiFi have accused Compass Mining of blundering its way into this situation. Following Russia’s invasion of Ukraine on February 24, many customers feared that their mining machines would be caught in the brewing geopolitical crisis, and some asked for the equipment to be removed. “I told them, ‘Listen, let's move the miners out of Russia. It doesn't make sense to continue to deploy there,’” recalls one customer, who asked not to be named because they still have ongoing business with Compass. “A lot of other people did the same.”

Compass’ response, in a March 4 Discord message, has earned meme status among its customers. The company’s then-CEO, Whit Gibbs, wrote that the situation was “‘business as usual’ and there is no reason to be worried.” Gibbs went on to underline BitRiver’s links to the Russian government, implying that they would make the operation safer. (BitRiver did not comment on these supposed links.) “If the situation changes, Compass will take swift action to remove all machines out of Russia immediately,” Gibbs added.

Compass did offer customers the option to get out of the contract and take their machines elsewhere, but Todd says it was unclear how that would play out. “Some people wanted their miners returned, and they were told that there's just no shipping or logistics available,” he says. “Really, there was no choice for anybody apart from waiting for Compass.”

The customer says that when their business partner called Compass to inquire about pulling the equipment out of Russia, he was told that “they could not guarantee they could safely remove the machines.” According to emails shared with WIRED, the customer’s own request to deploy some of the machines they had ordered to a US facility instead of Russia was rebuffed by Compass. The customer says that between the cost of the machines marooned in Russia and the lost revenue due to their sitting idle, they have so far lost around $70,000.

The customer says that despite multiple requests, they still do not know their machines’ serial numbers. “Clients can easily obtain their serial numbers by contacting our Support team,” Heller says. Veribi, the Nevada company that is taking Compass to court in California on charges of breach of contract, negligence, conversion, and fraud, alleges a loss of over $1.5 million. From its evidence, however, it does appear to have received its 20 machines’ serial numbers.

On April 20, 2022, when the OFAC eventually decided to sanction BitRiver for “help[ing] Russia monetize its natural resources,” Compass sent a lawyerly email to its customers on April 21 announcing the ending of all relations with BitRiver. Compass asked for customers’ permission to sell their machines and recover at least some of the money, which Todd describes as “a fire sale,” a scenario that most customers—some of whom had paid up to $13,500 per mining machine—could not stomach. As Compass’ Discord filled with angry customers, Gibbs delivered a curious barb. “You could have hosted in another country, you chose Russia. take some personal responsibility [sic]” he wrote. Gibbs declined to comment for this article. Eventually, the company shut its Discord server down for good. That, Heller says, was due to the fact that “using Discord to support thousands of clients was unstructured and lengthened our response times.”

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After that, Gibbs had to “fall on his sword,” Todd explains. “There was just too much hype to the guy. He said too many things which turned out to be disingenuous at worst.” On June 28, Gibbs and Compass’ chief financial officer, Jodie Fisher, both resigned, with Heller and chief technology officer Paul Gosker stepping up as co-CEOs. It wasn’t only Compass customers, who by then had congregated on another unofficial Discord server, celebrating Gibbs’s departure; even some Compass employees expressed some relief.

In a Discord message posted the day after the announcement, Compass sales manager Andrew Nagel said that the two days after Gibbs’ resignation had been “the best days I’ve had in a long time.” He noted that Compass’ customer service had been “poor” for a long time. Even before the Russia affair, 2022 had been plagued by delays in the company’s US operations, culminating on June 27 in the public fallout with Dynamics.

Under the new leadership, the hope was, things would be different. But many Compass employees wouldn’t remain at the company long enough to see that happen. On July 7, the company announced the layoff of 15 percent of its workforce, as well as compensation and spending reduction across the board. The message was that Compass had grown “too quickly” and that had made it dysfunctional.

Compass is in many ways emblematic of a very specific age in crypto history. Buoyed by a pandemic-induced craving for novel risky assets, the price of bitcoin had grown vertiginously since late 2020, eventually touching its all-time high of $67,000 in November 2021. Compass Mining was incorporated in August 2020 with a business model predicated on the idea of allowing ordinary people—jocularly called “plebs” in the company’s now defunct Discord—to mine crypto.

According to CoinDesk, in its first two months of operations, Compass sold $11.4 million in mining rigs to its customers, and by March 2021, it was raising $1.7 million from cryptoland household names such as Mike Novogratz’s Galaxy Digital. Before even celebrating its first anniversary, Compass was throwing a yacht party in Miami. But in 2022, when growing inflation, Russia’s warmongering, and high-profile industry scandals brought crypto prices down—with a sector-wide loss of about $2 trillion—Compass, like many others, started experiencing problem after problem. Still, even after this fallout with its own customers, Compass’ reputational damage is nothing compared with the more serious financial difficulties that many other bitcoin mining companies, including some publicly listed ones, are facing.

“In Compass’ model they deal with retail, which has a really strong voice online, so their issues are broadcasted to the public with a speakerphone,” says Ethan Vera, cofounder and chief operations officer of crypto-mining infrastructure company Luxor Mining. “But the 2021 mining cycle has left many companies in a tough position. Over-leverage, too rapid growth, and purchasing machines at the top of the cycle is the common theme that will lead some companies to bankruptcies or fire sales of their assets.”

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Gian M. Volpicelli is a senior writer at WIRED, where he covers cryptocurrency, decentralization, politics, and technology regulation. He received a master’s degree in journalism from City University of London after studying politics and international relations in Rome. He lives in London.
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